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11

Insurers unprepared for possible effects of climate change on capital

Open-access content Thursday 19th November 2015 — updated 5.50pm, Wednesday 29th April 2020

Insurers could find their capital under strain from the unpredictable effects of climate change, market rating firm Standard & Poor’s has warned.

2

It said they may face a wider range of threats than the anticipated increase in weather-related claims, including lower investment income and higher capital requirements.

The greatest danger stemmed from unexpected and abrupt changes, as insurers have processes to mitigate risks that arise gradually and with sufficient warning but climate change could affect them in ways that give no clear signals to guide decision makers.

Calculations in a report by Standard & Poor's indicated insurers could have to manage a reduction of about 0.5% in capital adequacy per year, possibly at the expense of dividends being 5-10% lower.

"In our view, climate change could affect insurers' prospective capital adequacy through reducing earnings and by increasing the level of required capital, if its impact is not anticipated," the firm's report said.

Standard & Poor's produced the report ahead of the COP 21 conference on climate change, due to convene next month in Paris.

It said the insurance industry saw climate change as one of its top emerging risks and many firms took account of the latest scientific findings when considering their  operations.
But they did not typically view climate change as a major threat to their day-to-day activities as they anticipated that their ability to reprice and renew non-life policies annually offered protection against increases in weather-related claims attributed to climate change.

Potential consequences of climate change on insurers' capital adequacy over the 2016-50 period could include reducing earnings through the potential for higher weather-related claims, but also through lower investment returns.
A possible increase in required capital could result from increased volatility in weather-related claims.

It said much of the uncertainty regarding the magnitude of climate change came from the lack of clarity over future carbon dioxide emissions, which may be the subject of a new global agreement at the COP 21.

Standard & Poor's estimated that insurers' capital management would be sufficient to manage the predicted changes in capital adequacy and lower dividends, but warned that estimating how climate change will play out "is inherently uncertain, so the picture may change dramatically over time".

This article appeared in our November 2015 issue of The Actuary.
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